December 5, 2018 / 11:52 AM / 8 days ago

UPDATE 3-Canadian Natural cuts capital budget 20 pct, shares jump

(Adds details on 2019 outlook, crude by rail, share update, quote from executive)

By Julie Gordon

VANCOUVER, Dec 5 (Reuters) - Canadian Natural Resources Ltd on Wednesday forecast a roughly 20 percent drop in capital spending in 2019 compared with 2018, blaming a lack of market access for its oil and the “dysfunctional” pipeline nomination process.

But Canada’s largest oil producer also said relief was on the horizon, noting it sees some 615,000 barrels per day (bpd) worth of new takeaway capacity in place for Western Canadian producers by the fourth quarter of 2019.

That will be further bolstered by the Alberta government’s controversial decision to mandate output cuts of 8.7 percent, or 325,000 bpd, to help boost sagging Canadian crude prices, a plan which Canadian Natural supports.

The company’s shares jumped 4 percent, trading at C$37.26 on the Toronto Stock Exchange as the broader energy sector rallied on higher oil prices.

Canadian Natural set its 2019 capital budget at around C$3.7 billion ($2.8 billion), down about C$1 billion from 2018 spending, with maintenance capital targeted at about C$3.1 billion.

“If prices normalize further out, combined with more certain market access, we will look to add growth capital in 2019 to the C$4.4 billion range, which would give us growth in 2020 and beyond,” said Canadian Natural President Tim McKay in a webcast presentation to investors.

Canadian Natural said the Alberta government’s curtailment plan has already improved the outlook for prices in early 2019, though it continues to monitor the impact.

The rare move to mandate cuts is unusual for a market economy like Canada and a number of integrated producers with secured pipeline access and domestic refinery capacity expressed disappointment, saying they prefer “market” solutions to the problem..

Canadian Natural also said it was pushing for immediate changes to the nomination system for Canada’s largest crude pipeline network.

Enbridge Inc’s Mainline system that carries about 1.2 million bpd of crude and other liquids operates as a common carrier, which means producers nominate, or request, space on the line on a monthly basis and are allocated a share of capacity based on total requests.

Producers game the system by requesting more space than they need, leading to so-called “air barrels” leaving the pipelines running below capacity.

“This market inconsistency is the reason why Canadian Natural and other producers feel the nomination process is broken and the market is dysfunctional,” said Bryan Bradley, Canadian Natural’s vice president of marketing.

Enbridge has been trying to fix the problem for years.

OUTLOOK IMPROVING

Looking ahead, Canadian Natural said it expects crude-by-rail volumes to rise by 150,000 bpd through 2019, topping some 400,000 bpd by year-end, compared with September’s rail exports of nearly 270,000 bpd.

Longer term, the company is watching progress of two export projects that have faced recent delays: TransCanada Corp’s Keystone XL pipeline and the government-owned Trans Mountain pipeline expansion.

Together they would add another 1.42 million bpd of export capacity for Canadian producers, of which Canadian Natural has secured 250,000 bpd of space. That transport security would allow the company to move ahead with larger growth projects.

Canadian Natural said it expects 2019 production to be between 1.03 million barrels of oil equivalent per day (boepd) and 1.1 million boepd.

The company said it has the ability to produce more condensate, a very light oil that is used in blending and is not included in Alberta’s production caps. ($1 = 1.3381 Canadian dollars) (Reporting by Julie Gordon in Vancouver, Aparajita Saxena, Shariq Khan in Bengaluru; Editing by David Gregorio and Marguerita Choy)

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